Why Have Top Executives Escaped Prosecution?

In response to:

Judge Jed Rakoff raises an issue that is well worth discussion, especially as we consider how best to avoid a repetition of the 2008 financial crisis [“The Financial Crisis: Why Have No High-Level Executives Been Prosecuted?,” NYR, January 9]. However, what his article does not say is just as notable as what it does say. As both a corporate lawyer and adjunct law teacher who has thought and written extensively in law reviews about these matters, I feel compelled to respond to his analysis.

Judge Rakoff fails to mention that one reason there have not been more criminal prosecutions involving mortgage-backed securities is that the one case that was brought resulted in an acquittal of the defendants on all charges. This case was brought in the Southern District of New York where Judge Rakoff sits and involved executives of a Bear Stearns hedge fund. Similarly, in a major civil case that was brought in Delaware against directors of Citigroup as a result of its mortgage security problems resulting in a gigantic bailout, directors avoided liability.

Why did these cases turn out in this manner? Notwithstanding the judge’s implicit premise that many laws were broken, it appears that this is not the case. While this writer has lamented this fact and proposed significant changes in law, under present corporate and securities law, horrible management of a financial institution is not a civil wrong, much less a crime, so long as appropriate procedural steps were taken and there was adequate disclosure to investors of the risks associated with the practices and transactions in question. It is quite noteworthy that despite his extensive use of the words “fraud” and “intent,” the judge does not identify a particular state or federal statute that he believes to have been violated.

By the same token, he also does not identify any instances of misstatement or misrepresentation in connection with mortgage security origination. Without a doubt, there were far too many sloppy and reckless business practices leading up to the 2008 meltdown. In my opinion, much of the recklessness involved disregard of risks that were clearly disclosed. There was also far too little oversight of the persons responsible for these practices by their ostensible superiors on boards of directors and in upper management. However, under our present system of corporate and securities laws, there is a fundamental difference between reckless practice and fraud.

My assessment of the situation is that the answer to Judge Rakoff’s question in the title is that (more) high-level executives have not been prosecuted because they have not committed crimes or civil wrongs as the law now stands. I think that observers would better serve our country by pursuing changes in our corporate laws to deter this problematic behavior going forward than [by] lamenting the past.

Marty Robins, Esq.
Fisher Broyles LLP
Chicago, Illinois

Jed S. Rakoff replies:

Early in my article, and repeatedly thereafter, I made clear that “every case is different, and I, for one, have no opinion about whether criminal fraud was committed in any given instance.” By contrast, Mr. Robins, apparently on the basis of just two cases, draws the sweeping conclusion that few if any high-level executives “committed crimes or [even] civil wrongs” in connection with the events leading up to the financial crisis.

The first such case on which he relies is the acquittal in November 2009 of two Bear Stearns hedge fund managers prosecuted not in my judicial district (as Mr. Robins erroneously states), but in the Eastern District of New York. Although the general consensus is that the case was less well tried by the prosecution than it might have been, the jurors, who were interviewed extensively after the case, did not believe that the defendants were necessarily innocent but only that the government had not proved its case beyond a reasonable doubt. (See, for example, “Bear Stearns Trial: How the Scapegoats Escaped,” The New York Times, November 12, 2009.) More to the point, it would have been unreasonable for the government to conclude on the basis of a single acquittal in a difficult case that no high-level executive had committed criminal fraud anywhere in connection with the financial crisis; and there is no indication that the government did so conclude—which is why one must look elsewhere for explanations.

Even less to the point is the second case relied on by Mr. Robins, an unidentified civil case in Delaware court in which the “directors avoided liability.” I am not sure what case Mr. Robins is referring to, but my article was in no respect concerned with the liability (if any) of directors, but with the liability of management. And management, that is, executives, have been the subject of numerous private and regulatory lawsuits in the wake of the financial crisis, in a great many of which they have accepted judgments against them, even if not admitting liability.

To note just the most prominent example, in June 2009 the SEC (which has no power to bring criminal prosecutions) brought a civil action against Countrywide Financial Corporation’s three most senior executives—Angelo Mozilo, David Sambol, and Eric Sieracki—accusing them of falsely and intentionally misrepresenting the quality of Countrywide’s mortgage-backed securities over a period of several years. Four days before the case was scheduled to go to trial, the defendants settled, with Mr. Mozilo agreeing to pay $67.5 million. (See Gretchen Morgenson, “Lending Magnate Settles Fraud Case,” The New York Times, October 15, 2010.) Although, in accordance with the SEC’s policy at the time, the defendants were permitted to settle “without admitting or denying” the allegations of fraud, one is left to wonder why the Department of Justice did not bring a parallel criminal case.

The reason cannot be, as Mr. Robins suggests, that there is no state or federal statute covering such behavior. On the contrary, at the federal level alone, there are numerous statutes that criminalize the intentional making of false statements regarding the creditworthiness of mortgage-backed securities, including the mail fraud statute (18 U.S.C. § 1341), the wire fraud statute (18 U.S.C. § 1343), the bank fraud statute (18 U.S.C. § 1344), the securities fraud statute (15 U.S.C. § 78ff), and many more. Thus, I respectfully disagree with Mr. Robins’s ultimate suggestion that we need more laws “to deter this problematic behavior.” So far as criminal prosecutions are concerned, the legal weapons are already there. The question is, who will use them?